Closing Costs: What Are They and Who Pays?

Closing costs usually range from 3% to 6% of the loan amount, which means $6,000 to $12,000 on a $200,000 mortgage. These costs include things like loan origination and underwriting, appraisals, title searches, attorney fees, and insurance premiums that complete the purchase of your home. Most of the time, buyers pay for most of the costs, while sellers pay for real estate commissions, transfer taxes, and title preparation fees. However, these costs are negotiable, and sellers who really want to sell may offer to help you pay for them. The Loan Estimate you get within three business days of applying and the Closing Disclosure you get three days before closing help you avoid surprises and let you compare lenders, plan your closing time wisely, and negotiate effectively to lower your out-of-pocket costs.

Key Takeaways

• Closing costs include many third-party fees in addition to your down payment. These fees include loan origination, underwriting, real estate agent commissions, home appraisals, title searches, attorney fees, insurance premiums, property taxes, and credit report charges that make sure the transaction is legal and financially sound.
• Buyers and sellers are responsible for closing costs in different ways. Buyers usually pay for most of the costs, while sellers usually pay for real estate commissions, transfer taxes, title preparation, and HOA transfer fees. Escrow fees are usually split, and VA loans limit what buyers have to pay.
• Lenders must give clear cost information at certain points, such as Loan Estimates within three business days of the application and Closing Disclosures three days before closing. If there are big differences between the two documents, the lender must be contacted right away to fix them.
• Timing and negotiating in a smart way Cut down on closing costs by closing late in the month to avoid paying daily interest on prepaid loans, taking advantage of buyer's markets where motivated sellers make concessions, and negotiating FSBO purchases where there are no realtor commissions to save money.
• A 20% down payment gets rid of PMI from closing costs, which means you don't have to pay private mortgage insurance premiums, which add to both your upfront costs and your monthly payments. However, if you include closing costs in your loan, you will save money right away but pay higher interest rates over time.

Welcome to a bright future with your new home in sight! You're eager to get those keys in your hands, but first, let's talk about closing costs. It's essential to understand how they work to avoid any surprises at the closing table. Many homebuyers underestimate these expenses, but we're here to clarify everything for you so your closing goes smoothly, and you can start creating memories in your new home.

So, what exactly are closing costs?

Closing costs are the expenses incurred at the finalization of your mortgage, separate from your down payment and necessary to complete the home purchase. They encompass various fees such as loan origination, underwriting, real estate agent commissions, home appraisal, title searches, closing attorney fees, insurance premiums, property taxes, credit report charges, and other transaction-related expenses.

The exact amount of closing costs varies based on factors like your loan type and location, typically ranging between 3 – 6% of your loan amount. For instance, on a $200,000 mortgage, expect closing costs to fall between $6,000 and $12,000. Whether buying a home or refinancing, these costs are integral to the process. While additional expenses are never pleasant, understanding them ensures a smoother home buying or refinancing journey.

Why are closing costs necessary?

Closing costs are essential because various third parties, such as lenders, inspectors, and attorneys, provide crucial services to finalize your home purchase. These professionals ensure the legality and integrity of your transaction, safeguarding your investment through thorough inspections and clear title searches, which are critical in the home buying process.

Who typically pays closing costs?

Both buyers and sellers may share responsibility for closing costs, although buyers generally cover most expenses. Sellers typically handle real estate commissions, transfer taxes, and title preparation fees. Homeowner Association (HOA) transfer fees are also usually the seller's responsibility. Escrow fees, a portion of closing costs paid to an escrow or title company for closing services, are often split between the buyer and seller. Some costs may be absorbed by third parties, depending on the loan product. For instance, VA loans limit what buyers can pay in closing costs, benefiting Veterans and active-duty military. Check VA-backed loan programs or the VA website for details on VA loan closing costs.

Ultimately, closing costs are negotiable between buyer and seller, and your lender or real estate agent can assist with these discussions. Seller concessions, where motivated sellers use home equity to help cover closing costs, can be advantageous if you're concerned about funding these expenses.

How much will I need to pay in closing costs?

Within three business days of submitting your loan application, your lender must provide you with a Loan Estimate (LE), an important document that details the estimated closing costs. Take your time, carefully read it, and reach out to your lender with any questions. Then, three business days before your loan closing and receiving the keys to your new house, your lender or real estate agent will provide you with a Closing Disclosure (CD). The CD may show slight fluctuations from the original LE, but there shouldn't be any surprises. If you notice a significant change between the LE and CD, contact your lender or real estate agent immediately.

How can I reduce my closing costs?

We get it – you'd love to avoid closing costs all together. While this is (unfortunately) not an option, there are some ways you can potentially reduce your closing costs.

Shop around.

You're in the driver's seat, and you get to choose which lender you want to use. Contact multiple lenders and comparison shop. Look for one with competitive rates and lower fees.

Close at the end of the month.

Closing later in a calendar month can reduce certain closing costs, particularly those related to prepaid daily interest charges. Your lender can provide guidance on this matter, and any limitations on prepaid daily interest charges will be governed by state law.

Take advantage of a buyer's market.

If you have a motivated seller (perhaps one whose home has been on the market for a while), they may be willing to help cover some of your closing costs. It never hurts to ask! And if you buy a for sale by owner property, the seller avoids realtor commission fees. Use this fact to help negotiate seller paid closing costs to lower your own out of pocket closing expenses.

Ask your lender if closing costs can be financed into the loan.

Ask your lender about the option to finance closing costs into the loan. Keep in mind that while this can be convenient upfront, it may lead to higher interest rates over time. Evaluate the impact on your long-term financial situation carefully before making a decision.

Pay cash.

This isn't an option for most of us, but if you can buy a home with cash (not requiring lender financing), you'll substantially lower many real estate transaction closing costs.

If you can't pay cash, try making a 20% down payment on the home purchase.

That way, you may not have to pay for private mortgage insurance, which is part of your closing costs and subsequent monthly payments.

And More Good News

At AmeriSave, we're committed to advocating for American homeowners by providing the right mortgage options and rates to enhance your long-term financial health. Our dedicated mortgage bankers prioritize your needs, whether discussing closing costs or navigating the entire mortgage process. With some of the lowest rates in the industry, we empower our customers to dream bigger and achieve a brighter future.